Default May Hurt Chances for Los Osos Sewer Loan
By ?Sona Patel, The Tribune, San Luis Obispo, Calif.
Mar. 18–The county may face difficulty getting money to pay for a sewer in Los Osos because the town’s services district defaulted on a multimillion-dollar state loan.
As a result, county officials tasked with the design and construction of a sewer must find a way to repay the $6.5 million borrowed from the state that was spent on a project scrapped in late 2005.
When Gov. Arnold Schwarzenegger signed into law a plan by Assemblyman Sam Blakeslee, R-San Luis Obispo, that transferred design and construction of a Los Osos sewer to the county, his bill-signing message instructed the state not to lend money for the project until the millions borrowed before are paid back, or a payment plan is set up.
The loan came from a state fund that doles out money to California communities to help them build sewers or other projects to improve water quality. That fund is an attractive choice for communities that want to borrow because of its low interest rates, flexible payment terms and the large amount of money available.
Los Osos was the first community that defaulted on paying back a loan in the fund’s 20-year history, according to William Rukeyser, a spokesman for the state Water Resources Control Board.
“If Los Osos were allowed to walk away from its legally binding debt, that would mean that other communities in California would be deprived of what Los Osos was already offered,” Rukeyser said.
“We want to see that money regardless of where it is,” he added. “A loan has to be paid back.”
If Los Osos could not use the revolving-fund program, it would have to find money another way, such as through a bond issue or in commercial markets. Either option would bring a higher cost to the town’s residents. And if the repayment amount is added in, the bill gets higher.
“We want (a state loan) because of the low-interest rate making it the cheapest money out there,” said Paavo Ogren, the county’s deputy public works director and sewer project manager. “But when you add in the $6.5 million, it no longer makes it cheap money.”
Financial issues
Construction on the now-defunct sewer project began soon after the Los Osos district got its first installment of a $135 million state loan in 2005.
That was before a September 2005 recall election in which the campaign centered on financial and environmental concerns about the project. The board majority that ordered construction to start on the sewer was ousted in the recall.
A month later, the new district board stopped work on the sewer. The services district then lost the loan, and the Central Coast Regional Water Quality Control Board fined the agency $6.6 million for taking too long to build a sewer.
The district has spent $4.3 million of the state loan installment on legal and administrative bills and payments to project contractors.
Payback time
If the county wanted to apply for a new state loan, setting up a payment plan for the millions of dollars in default would likely be its best option for getting money.
It would be illegal to roll the defaulted money into a property tax increase because any assessment voted on by property owners could only account for the costs of a new project, according to Jon Coupal, president of the Howard Jarvis Taxpayers Association.
He is known for authoring Proposition 218 — the Right to Vote on Taxes Act approved by California voters in 1996. A vote of Los Osos property owners would be conducted under the terms of that law.
If two-thirds of Los Osos property owners fail to approve a property tax increase, responsibility for building a sewer would, under Blakeslee’s plan, revert back to the town’s services district.
Faced with a web of lawsuits and an estimated $40 million in debts, the Los Osos district filed for Chapter 9 bankruptcy protection.
Meanwhile, the roughly $2 million unspent from state loan proceeds remains frozen by a San Luis Obispo County Superior Court judge.
In April, Judge Roger Picquet blocked the district from using the loan money until the agency resolves a payment dispute with two contractors hired to build the sewer.
If that money were to become available, district board President Chuck Cesena said that he did not know whether it would go toward paying back the state.
“Either way it’ll be used toward the bankruptcy,” Cesena said. “I don’t know who’s going to wind up with it.”
Ogren said the county is hoping to establish a 20- or 30-year payment plan so that Los Osos sewer ratepayers won’t see a significant increase in their monthly bills.
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Copyright (c) 2007, The Tribune, San Luis Obispo, Calif.
Distributed by McClatchy-Tribune Business News.
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